Thursday, February 19, 2009

Supply & Demand in Action

Right now gas is flirting with $2.00/gallon up here in the Fox Valley. Some are at $1.93 or so and some at $1.99. This is up from lows in the $1.50/gallon range.

People are starting to grumble about how oil is going sideways but gasoline is creeping upwards in price. That can't be supply and demand can it? Those dirty rotten buggers are GOUGING us as usual, right?

WRONG.

The tango of supply and demand is very very interesting and that dance has a very real impact upon producers who have to pay for raw materials, capital, and labor. That dance is one I have danced from both sides. Obviously I am a US resident I consume a fair amount of energy and food - I am a demander. However, during the summer some friends and myself run a booth at Appleton's Octoberfest selling pork barbecue on a stick -- Filipino style.

The first summer we made said product we sold them for $1.00. We profited, we worked our tails off both to produce the product and prepare it for sale at the fairs (Farmer's Market too). Next summer we raised our price to $2.00, still we profited more, but demand and work was just the same. We were moving about the same volume of product. We had long lines, busy cooks, long waits for product.

For our last outing we set our price at $3.00/stick and produced less. For Octoberfest (we didn't participate in The Farmer's Market last summer) we were used to selling about 1,500 sticks or so (plus soft drinks & some lumpia), but last fall we came to town with 1,100 or so sticks (no strict accounting going on here). This time, our lines were smaller, our customers had less wait, we were able to put in less effort, and our take was very comparable (pretty much the same) to previous years! That is, despite selling less product we made the same gross and hence our profitability increased!

Why in the world, would we want to go back to $2.00 or $1.00 sticks? Now, notice, it was a process of discovery. Now, I have not closely tracked what our expenses did in the years, but I am guessing they have not significantly increased -- that is they did not go up by 200% as our prices did.

So, why are gasoline producers any different? If they can make the same profit by working less why would they work more to make less profit?

Get on the other side of the demand curve and see how price points affect sales, revenue, and profit.

One disclaimer. The above epiphany was by chance, we did not make a conscious decision to cut our production, I was just in a pi$$y mood when planning it and the local licensed kitchens made things hard for us. Still, it worked out nearly perfect.

One last thing before I go. I would guess the market would not bear $4.00/stick. Sure, we would sell some, but I am guessing the drop in sales would overcome the increase in price, plus there are other vendors on street with comparable products.